Recent developments in the country’s legislature have marked the passage of the Chit Funds (Amendment) Bill, 2019 by the Parliament. The essence of this bill revolves around streamlining the functions of collective investment schemes or chit funds. The major objective set for this amendment is the protection of investors who chiefly belong to the economically weaker strata of the society.
The Concept of Chit Funds
Chit funds are basically an agreement among a group of people who mutually decide to contribute certain amounts at periodic intervals into a common fund. The unique feature of this system is that, at regular intervals, one of the subscribers is selected through a lottery-like process to receive the lump sum amount from the fund. It is especially prevalent and legal among the poor sections as it serves dual purposes – a source of finance as well as a path for savings. Despite being often compared with, it is necessary to note that chit funds are quite distinct from ponzi schemes and unregulated deposits.
Understanding Ponzi Scheme
In stark contrast to chit funds, a Ponzi scheme is an investment fraud which essentially pays existing investors from the funds accumulated from new investors. The allure of high returns with minimal or no risk is dangled before potential victims. These individuals are led to falsely believe that significant profits are being generated from product sales or other sources, remaining completely oblivious to the fact that their returns are actually being paid out from other investors’ money.
Why the Need to Amend the Chit Funds Act?
The Chit Funds Act of 1982 underwent amendments primarily with twin aims in mind. Firstly, to safeguard investor interests, given the significant role chit funds play in providing financial access and investment options to the rural populace of India, particularly in areas devoid of banking and financial institutions. Secondly, it aims to put a halt to fraudulent activities by incorporating stringent measures.
| Parameters | Before Amendment | After Amendment |
|---|---|---|
| Maximum Commission for Foreman | 5% of Chit amount | 7% of Chit amount |
| Chits for Individuals/ Firms with Less than Four Partners | One Lakh Rupees | Three Lakh Rupees |
| Chits for Firms with Four or More Partners | Six Lakh Rupees | Eighteen Lakh Rupees |
Key Features of the Bill
The amendment has brought about certain notable changes to the Chit Funds Act 1982. The list of names to refer to a chit fund has been expanded to include ‘fraternity fund’ and ‘rotating savings and credit institution’. The bill proposes video-conferencing as an option for the presence of subscribers. Foreman’s commission has been hiked from 5% to 7%, with additional provision of a right of lien against the credit balance from subscribers. The aggregate limit of chit funds has been escalated to three lakh rupees and eighteen lakh rupees for individuals or small firms and bigger firms respectively. Lastly, the Act now includes chits started before its enactment and those managed by the same foreman amounting to more than Rs 100, providing state governments the authority to declare the extent of the Act’s application.
Last Modified: February 6, 2024